The Israeli Economy the Tale of Two Countries During Covid-19
It’s been two months since I received my second Pfizer vaccine. However, only now, in the last few days, have I felt the end is in sight. Coronavirus infection numbers in Israel have finally started to drop rapidly, with the positive rate of tests now just 2%. Over 90% of the population over age 50 have already been vaccinated, with younger age groups not far behind. I personally do not know anyone who has not been inoculated. While vaccines do not provide 100% protection, at this point, for the first time in a year, I no longer worry about getting sick. So do most Israelis with bars and restaurants now full of people.
It’s not, of course, all good news, Israel has now surpassed 6,000 Coronavirus deaths (which works out to 685 deaths per million, i.e., better than the United States, but worse than Greece, and ten times that of Japan). Not a record of which we can be proud. Challenges remain; not everyone is willing to get the vaccination, and of course, children cannot be vaccinated. Health experts know that until the Palestinians in the West Bank are vaccinated, it will be nearly impossible to reach herd immunity. Finally, there continues to be the fear of a variant that might be resistant to the vaccine.
The pandemic has widened several fissures in the society, especially those between the secular community and the ultra-Orthodox, who make up about 10% of the Israeli population. However, a different divide definitively deepened during Corona, and that is that divide which I want to examine now — i.e. the divide between Israel’s high-tech sector and the rest of the economy; a gap which has been growing rapidly over the past decade, and became even more pronounced this past year, as a result of Coronavirus. Israel’s high-tech sector did extraordinarily well while Covid raged, while most of the rest of the economy just survived.
According to Jon Medved, CEO of OurCrowd (Israel’s most active VC company),
“Israel weathered the pandemic storm rather remarkably. With the overall economy contracting only 2.4% relative to the OECD average of 5.5% for the year 2020. This was in large part due to the strong showing of Israel’s high-tech sector led by its dynamic startup ecosystem, which raised $10.2B in 2020; up from $8.3B in 2019 for growth of 23%, which is not too shabby for a pandemic year. This strong high-tech performance was in line with global trends where the Pandemic accelerated digital transformation pushing many high-tech companies forward at an unprecedentedly rapid rate.”
Yifat Oren, the CEO of LeumiTech, Bank Leumi’s independent bank aimed at the tech sector, took a similar, but slightly different approach:
“Israeli high-tech, including life sciences has become stronger during the Pandemic, thanks to the Pandemic. The Israeli Tech industry has, and continues to attract, significant levels of funding from leading investors around the world, going public at an increased pace, with public companies gaining momentum and showing a substantial rise in valuations (as the markets project their growing attractiveness). As part of the Israeli economy, Tech exports have assumed a growing volume of the country’s total exports (reaching 62.7% weight of tech export out of total service exports in 2020 vs. 57.2% in 2019).”
The Coronavirus Pandemic increased need for products provided by most of Israel’s tech firms. These included tech-based service firms such as Wix, who saw their sales soar, as every business rushed to go online, and Israel’s numerous cybersecurity firms, all of whose products have been in tremendous demand during the Pandemic. There are now 21 unicorns (private companies worth more that $1 billion) in Israel — 11 of them reached that size in the last year.
Many hope the super-strength of the high-tech sector will be enough to carry the Israeli economy beyond Covid. Oren is not sure. She said:
“Tech is assumed to be a crucial pillar in driving Israeli economy out of the COVID-created crisis. As much as this is a tailwind to the economy's revival, it is probably not enough. It is the duty of the Israeli government, as well as the banking system in Israel, to furnish the necessary growth capital (grants and special incentives or abundance of accommodative lending) respectively, to support the rest of the Israeli economy [other than Tech]. This will provide companies with the wherewithal to become more innovative and integrate more technology into their products.”
I spoke with Labor Party Chair Merav Michaeli, who through sheer will-power and tenacity gained control of the Party and seemingly done the impossible— brought back to life a party that all had written off as dead. I asked what she thought to be the impact of Covid on the Israeli economy.
Michaeli highlighted it was not only Israel’s high-tech economy that did well during Covid. Other prominent players also prospered, for example, supermarket and pharmacy chains grew notably stronger, as did all of those businesses who were allowed to continue providing service. Supermarkets and drug stores became a places people were allowed to go. WOLT (a restaurant delivery app that has conquered the Israeli market) is another company that flourished tremendously over the course of the pandemic. While these businesses boomed, their success came at the expense of the smaller shops which were not permitted to open. The stronger players took advantage of the situation and made greater profits.
I asked Michaeli what we could do to bridge the gap between those who have succeeded during Covid and those who have not. Michaeli replied:
“As a strategy, what is most needed to come out of this crisis is to invest in Israeli society; to strengthen the public sector that Netanyahu has starved and neglected. Social services in Israel are in a dire state. There has been no investment, no vision, and no planning for far too long. The health system, the education system, the welfare system, all need major restoration and nourishment.”
Michaeli went on to say that under her leadership, the Labor Party will emphasize the importance of supporting and strengthening the “pink-collar” workers — i.e. jobs like teachers, social workers, and public service psychologists, primarily held by women. Michaeli urged: “These essential employees are grossly underpaid and under-equipped. They need to be reinforced and given better tools to work with people, to improve the lives of those who are being left behind.”
Within all the loss, the tourism sector has been the hardest-hit sector of Israel’s economy. Hard-hit companies range from Israel’s airlines, which have been almost fully grounded (except for minimal flights and cargo) to hotels. However, without doubt, the groups that suffered the greatest financial losses were those who deal with incoming tourism.
I spoke to Yitzhak Sokoloff, founder and CEO of 25-year-old Keshet, one of Israel's most prominent incoming tourist group facilitators. The year before the pandemic, Keshet brought 8,000 people to Israel on several hundred programs, between 2 months and ten days in duration. One year ago, Keshet discovered 99% of its business disappeared, in just one month. As a result, Keshet was forced to lay off almost all of its employees.
According to Sokoloff, after an initial period during which the government was indecisive about aiding businesses and workers, it did eventually act. Government intervention allowed most of his highly trained workers to stay home, do volunteer work and wait for his company to come back, while providing Keshet with grants that allowed it to cover its fixed costs. Sokoloff added that the fact Keshet is a long-established, profitable company allowed it to survive, sadly, many of his smaller competitors were not so fortunate.
What Sokoloff confided tracked closely with what I heard from Edward Kaufman, the managing Partner in Kaufman & Associates, a mid-sized Israeli accounting firm, with 950 clients. Kaufman confirmed that most of his clients managed to make it through the crisis. It was certainly difficult, but government aid enabled them to survive. Kaufman's concern, one shared by Sokoloff, is — What now?
Sokoloff is unsure when his first customers will return. He hopes incoming tourism will return by this summer. If the pandemic is indeed over, he needs to start bringing back his employees to prepare (as do Kaufman’s clients), but where will they procure the working capital to get started all over again?
High-tech companies never slowed down during COVID–19. Most high-tech employees remained working from home, as their companies continued to grow. Almost everyone else, defined success as survival. As Elad Oren, proprietor of “Sylvia Bumper,” a neighborhood bar, told me: “What’s most important is that we’re back at work. It was hard. We will have to pay off loans, but we are still in business.” Sylvia Bumper survived, and for many, that will have to be enough.
